Title Financing Small and Medium Enterprises in Myanmar Author(s ...

of SMEs in the past few years. Thus, banks, including the central bank, are extra
careful when it comes to lending to SME sector; they practice onerous banking
procedures for loan applications, high demand for collaterals, and allow only short-term
loans. As a result, bank loans cannot be used for business expansion and the acquisition
of fixed assets that are crucial in the long-term survival of the business.
6.3 Supply-side Problems
As in the demand side, there are also problems on SME financing in the supply
side. First, there are no SME financing programs funded by the state. State funds are
dedicated for subsidizing inefficient SEEs in the public sector.
Second, due to the bitter experience of banking crisis in the recent past (February
2003), the central bank has issued too many regulations on the activities of commercial
banks in both structural and operational aspects, including reserve requirements,
deposit-to-loan ratio, branching allowances, loan processing procedures, and so on.
Commercial banks cannot determine their own interest rate based on the
characteristics and quality of their borrowers or borrowing businesses. Virtually,
interest on deposit paid and charged for loans by the banks are almost the same across
all banks. Thus, banks cannot compete with one another based on interest rate
differentials. They only have to compete on the volume of processing and other services.
Loans made to businesses largely depend on the quality of collaterals. The quality
of business is not an important consideration. Once loan decisions have been made,
interest rate is the same for all borrowers, whether they have good or bad reputation or
creditworthiness or they are the bank’s regular customers or not. For creditworthiness
and regular customers, the only benefit offered by the bank is an easy access to
overdraft facilities. According to the central bank’s regulation, banks can make loans up
to 50 percent of the value of the collateral. But most banks stay on the safe side by
financing only up to 30 percent in most cases and 40 percent in exceptional cases, that is,
when the creditworthiness or the reputation of the borrowers is reliable. This has led to
a situation where credit evaluation skill is not important in running banking operations
in Myanmar. Only the skill to assess the value and quality of collateral property is
enough for successfully running banking business operations. This hampers the
capability of banks staff in making systematic assessment on the borrowers and
effective evaluation on their business plans, and consequently this will reduce the
long-term competitiveness among banks.
Taking too much caution on making loans to business has resulted in onerous and
daunting banking procedures in processing loan applications. This has led to high
transaction costs on the part of banks that reduced their profit from providing loans to